Refinancing denied due to "incomplete renovations in progress."

Asked by gary.pritchett, Medford, MA Thu Apr 4, 2013

Recently applied for refinance (30yr to 15yr, lower rate) of owner occupied, single family (equity approx 50%.) Perfect credit, employment, etc. Everything moved along as expected then lender denied, based on appraiser noting that the property value had been lowered due to incomplete renovations (am consolidating two bedrooms into one master suite (adding bathroom.)) Lender refuses to refund application fee - or request appraiser to rewrite, reducing value by estimated cost of completing work. My position is that lender was -or should have been- aware of this and required to ask me "is the property currently under any construction/renovation/remodeling?" during the initial application process. Any advice would be appreciated. Thanks.

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Tony Grech, Mortgage Broker Or Lender, Southfield, MI
Thu Apr 4, 2013
HI Gary,
Here is the underwriting rule referencing your situation (direct from Fannie Mae guidelines):

"Requirements for Existing Construction - When There are Incomplete Items or Conditions that Do Affect the Safety, Soundness, or Structural Integrity of the Property

When there are incomplete items or conditions that do affect the safety, soundness, or structural integrity of the property, the property must be appraised subject to completion of the specific alterations or repairs. These items can include a partially completed addition or renovation, or physical deficiencies that could affect the safety, soundness, or structural integrity of the improvements, including but not limited to, cracks or settlement in the foundation, water seepage, active roof leaks, curled or cupped roof shingles, or inadequate electrical service or
plumbing fixtures. In such cases, the lender must obtain a certificate of completion from the
appraiser before the mortgage is delivered to Fannie Mae. Although the original appraiser should
complete any required certification of completion, the lender may use a substitute appraiser."

Since this is a somewhat major renovation (as opposed to something minor like remodelling a bathroom), you're going to have to wait to complete the refinance. It's not a value issue - it's just not eligible right now.

This is not something that would normally come up in taking an application, so I think you probably should have asked the lender up front if this would be a problem. The application fee most likely went to pay for the appraisal and in most cases you receive a disclosure at the time of application stating under what conditions, if any, an application fee is refundable.

If you paid to apply for the loan AND for the appraisal, then I would politely ask if the lender would be willing to carry the application fee forward when the renovations are complete and you are ready to re-apply. There are some companies (I can think of one - it rhymes with "Chicken Loans") that tell you sorry, once you apply this fee is non-refundable no exceptions. I will normally work with the borrower to find an good compromise and apply things towards their future transaction. If they are not willing to work with you then finish your renovations and take your business elsewhere.

Hope this helps!
1 vote
Jennifer Har…, Agent, Las Vegas, NV
Mon Aug 8, 2016
I know it's 2016 and I'm late to the party, but there may be others in your situation now...

Your Loan Officer could've had you refinance using the FHA 203(k) loan.

You can make the following repairs and renovations to your home with the Full 203k:

Structural alterations and reconstruction:

Room additions
Repair of termite damage (sill plate replacement)
Major remodeling of kitchens and bathrooms
Finish an attic or basement
Add a second story to a home
Major landscaping and site improvement:

Correction of grading
Drainage problems
Tree removal (health and safety hazard)
Repair of sidewalks (health and safety hazard)
Driveway repair (health and safety hazard)
0 votes
thewhiting, Home Owner, Cambridge, MA
Mon Dec 30, 2013
If you weren't such a tool I'm sure the lender might have been a bit more cooperative.
Maybe you should see if your buddy, Obummer, has an opinion on the matter while you're at it.
0 votes
Wow, you trolls are everywhere.
Flag Tue Mar 31, 2015
Richard Shap…, , Framingham, MA
Fri Apr 5, 2013
Two things points in response to your last post:
-considering you are in the middle of things, if you think you will be finished soon you could stay with your current lender. Rates are improving today and should remain steady or lower for the next several weeks. You could finsih up and just have the current lender have an appraisal reinspection to show the work is done and then close.
-If you are done with the process and lender, then rates should be similar or lower in the near future. You could call the AG's office and tell them your issue. More than likely they will forward your complaint to the mortgage company you are dealing with and they will agree to refund the appraisal to make this all better.

If this were my business and I was dealing with your situation, I would be working with you on this as you will eventually close once the work is completed. Being a little greedy regarding a refund of an appraisal fee is cutting your nose to spite your face. I've eaten appraisals for all sorts of reasons and while its a cost of doing business, a happy customer (even if they cant close) will be worth more to me than a $400 refund
0 votes
gary.pritche…, Home Owner, Medford, MA
Fri Apr 5, 2013
I appreciate everyone's comments. In the end, though, I guess I was looking for something I suspected was non-existent. That is, an element of consumer protection.

If I list my property for sale I'm legally bound to first disclose any known problems and/or encumbrances. Why? To protect potential buyers from issues they were uninformed of yet, ethically/morally, should have been. The scale is tipped in favor of the average consumer; he is not expected to be "smart enough" to ask whether there is/had been a buried oil tank, a mechanics lien, etc.

Should I have wondered if I might be denied due to my incomplete renovation, and asked the broker/lender? I'm pretty sure that if refinancing consumers were asked to list the factors they knew would be considered (by the broker/lender) when contemplating pulling-the-trigger (that is, committing the application fee) the overwhelming majority would include: credit rating; employment status/history; recent/current financial statement; and, property equity. That's it; period.

Lenders implicitly support this, too. For example:…

I bet there must be many, many others who met each of the factors I listed above (and those specified in Wells Fargo's checklist) only to then be denied due to this underwriting "work-in-progress" issue.

Perhaps I'll see if our Attorney General's office has an opinion on the matter.

Again, thanks for your responses.
0 votes
Louis Wolfs…, Agent, Needham, MA
Thu Apr 4, 2013
As a certified appraiser Gary is 100% correct even when I give a line item number for cost to correct and the value is base on the as is condition, I have yet have a underwriter / lender that will approve it. My suggestion like that of Gary is to complete it and have them look at it again.
0 votes
FSBOsuccess, Home Seller, 28590
Thu Apr 4, 2013
Should you also have not disclosed what you were doing to the the lender? How was the lender supposed to know beforehand- crystal ball?
0 votes
Heath Coker, Agent, Falmouth, MA
Thu Apr 4, 2013
Hi Gary,
You might also be aware that removing a bedroom could also decrease the value.
That may be another reason.
I like the suggestion you already received - to see if the lender will credit you in the future with some of your already paid for expenses in the loan process.

(Please note: when you choose an answer as a Best Answer, or at least give a thumbs up, it helps those who answer questions here.)
0 votes
Richard Shap…, , Framingham, MA
Thu Apr 4, 2013
The lender knows nothing about your home other than the address. I have always learned of this from the homeowner. I understand your frustration but I would say if the lender offers you a split, take it.
0 votes
Jim Driscoll, , Lynnfield, MA
Thu Apr 4, 2013
I have had this happen recently with two similar transactions and the appraiser did an as is value. Because the loan to value was low and the client had another bathroom the underwriter signed off on it. This is really case by case and it is underwriter discretion.
0 votes
Jim Driscoll, , Lynnfield, MA
Thu Apr 4, 2013
I have had this happen recently with two similar transactions and the appraiser did an as is value. Because the loan to value was low and the client had another bathroom the underwriter signed off on it. This is really case by case and it is underwriter discretion.
0 votes
Loreen Cinga…, Agent, Medford, MA
Thu Apr 4, 2013
Unfortunately, Gary, with any financing, the lenders will not allow you to finance if repairs are needed or "in process". When it's a new purchase of an unfinished home, buyers are required to apply for a special rehab loan via FHA called a 203(k) loan. This loan encompasses the cost of the home and the cost of the renovations. I must be honest that I'm not sure if this would be an option for a refinance, but I would check with the lender, especially if you need money to complete the renovations. Best of luck to you!
0 votes
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